Crozer-Keystone Health System and its Subsidiaries Years Ended June 30, 2016 and 2015 With Reports of Independent Auditors

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1 C ONSOLIDATED F INANCIAL S TATEMENTS, S UPPLEMENTARY I NFORMATION, AND S INGLE A UDIT Crozer-Keystone Health System and its Subsidiaries Years Ended June 30, 2016 and 2015 With Reports of Independent Auditors Ernst & Young LLP

2 Crozer-Keystone Health System and its Subsidiaries Consolidated Financial Statements, Supplementary Information, and Single Audit Years Ended June 30, 2016 and 2015 Contents Report of Independent Auditors...1 Audited Consolidated Financial Statements Consolidated Balance Sheets...4 Consolidated Statements of Operations...6 Consolidated Statements of Changes in Net (Deficiency) Assets...7 Consolidated Statements of Cash Flows...8 Notes to Consolidated Financial Statements...9 Supplementary Information Crozer-Keystone Health System and its Subsidiaries Consolidating Balance Sheet...48 Consolidating Statement of Operations...49 Acute Care Affiliates Combining Balance Sheet...50 Combining Statement of Operations...51 Single Audit Schedule of Expenditures of Federal, State, and County Awards...52 Notes to Schedule of Expenditures of Federal, State, and County Awards...55 Report of Independent Auditors on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards...56 Report of Independent Auditors on Compliance for Each Major Federal Program and Report on Internal Control Over Compliance Required by the Uniform Guidance...58 Schedule of Findings and Questioned Costs...61 Delaware County Department of Human Services Schedule of Delaware County Behavorial Health Drug & Alcohol Programst...66 Schedule of Delaware County Behavorial Health Mental Health Programs...67 Notes to Delaware County Department of Human Services Schedules

3 Ernst & Young LLP 621 East Pratt Street Baltimore, MD Tel: Fax: ey.com Board of Directors Crozer-Keystone Health System Report of Independent Auditors Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of Crozer-Keystone Health System and its subsidiaries, which comprise the consolidated balance sheets as of June 30, 2016 and 2015, and the related consolidated statements of operations, changes in net (deficiency) assets, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free of material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements A member firm of Ernst & Young Global Limited

4 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Crozer-Keystone Health System and its subsidiaries as of June 30, 2016 and 2015, and the consolidated results of their operations, changes in net (deficiency) assets, and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles. Supplementary Information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying consolidating and combining balance sheets as of June 30, 2016 and consolidating and combining statements of operations for the year then ended; the Schedule of Expenditures of Federal, State, and County Awards as required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance); and the Schedule of County Behavioral Health Mental Health Programs and the Schedule of County Behavioral Health Drug & Alcohol Programs as required by Delaware County Department of Human Services are presented for purposes of additional analysis, and are not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States. In our opinion, the information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole A member firm of Ernst & Young Global Limited

5 Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we also have issued our report dated December 19, 2016, on our consideration of the Crozer-Keystone Health System and its subsidiaries internal control over financial reporting and on our tests of their compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Crozer-Keystone Health System and its subsidiaries internal control over financial reporting and compliance. December 19, 2016, except for the Schedule of Expenditures of Federal, State and County Awards; the Schedule of County Behavioral Health Mental Health Programs; and the Schedule of County Behavioral Health Drug & Alcohol Programs, for which the date is March 31, 2017 EY A member firm of Ernst & Young Global Limited

6 Crozer-Keystone Health System and Subsidiaries Consolidated Balance Sheets (In Thousands) Assets Current assets: Cash and cash equivalents 135,130 June $ $ 48,370 Short-term investments 13,992 Current portion of assets limited as to use 4,325 4,215 Patient accounts receivable, net of estimated uncollectibles of $39,550 and $34,000 in 2016 and 89,684 95, , respectively Other receivables 45,590 21,972 Inventories 10,262 9,642 Prepaid expenses and other current assets 6,684 9,945 Total current assets 305, ,255 Investments 68,672 Assets limited as to use: By board for capital improvements 83,647 Debt service reserve and project funds 9,733 9,641 Property and equipment, net 165, ,280 Investments restricted for donor purposes 8,644 9,155 Investments in joint ventures 33,899 39,727 Deferred financing costs, net 1,147 1,328 Goodwill and other intangibles 19,744 20,078 Beneficial interest in perpetual trusts 5,236 5,527 Other assets 23,039 20,533 Total assets $ 572,532 $ 601,

7 Liabilities and net (deficiency) assets Current liabilities: Current portion of long-term debt 13,424 June $ $ 10,396 Short-term borrowings 11,000 Current portion of notes payable Accounts payable and accrued expenses 122, ,204 Estimated third-party payor settlements 18 5,046 Current portion of deferred gain Total current liabilities 136, ,397 Long-term debt, excluding current portion 168, ,755 Pension liability 330, ,132 Other accrued retirement benefits 5,526 16,505 Other liabilities 36,635 37,429 Deferred gain, excluding current portion 8,021 8,754 Notes payable, excluding current portion Total liabilities 685, ,064 Net (deficiency) assets: Unrestricted net (deficiency) assets (127,105) 6,182 Temporarily restricted net assets 5,378 5,986 Permanently restricted net assets 8,364 8,611 Total net (deficiency) assets (113,363) 20,779 Total liabilities and net (deficiency) assets $ 572,532 $ 601,843 See accompanying notes

8 Crozer-Keystone Health System and Subsidiaries Consolidated Statements of Operations (In Thousands) Year Ended June Unrestricted net assets Revenues, gains, and other support: Net patient service revenue before provision for bad debts $ 769,090 $ 740,354 Provision for bad debts (29,904) (29,878) Net patient service revenue less provision for bad debts 739, ,476 Other revenue 47,638 57,029 Investment (loss) income, net (327) 9,155 Total revenues, gains, and other support 786, ,660 Expenses: Salaries, wages, and benefits 464, ,131 Supplies, purchased services, and other 244, ,534 Quality care assessment 16,724 14,515 Depreciation and amortization 23,195 22,513 Transaction costs 3, Interest 7,771 7,656 Insurance 9,309 9,023 Total expenses 769, ,008 Income from operations before other items 16,605 5,652 Other items: Income (loss) from joint ventures 1,345 (4,893) Excess of revenues, gains, and other support over expenses (before curtailment net loss) 17, Curtailment net loss (617) (1,747) Excess (deficiency) of revenues, gains, and other support over expenses 17,333 (988) Other changes in unrestricted net (deficiency) assets: Change in net unrealized losses on investments (4,132) (5,067) Other changes in pension and other accrued retirement benefits liabilities (146,578) 27,459 Net assets released from restrictions used for purchase of property and equipment (Decrease) increase in unrestricted net (deficiency) assets $ (133,287) $ 21,910 See accompanying notes

9 Crozer-Keystone Health System and Subsidiaries Consolidated Statements of Changes in Net (Deficiency) Assets (In Thousands) Year Ended June Unrestricted net assets (deficiency) Excess (deficiency) of revenues, gains, and other support over expenses $ 17,333 $ (988) Other changes in unrestricted net (deficiency) assets: Change in net unrealized losses on investments (4,132) (5,067) Other changes in pension and other accrued retirement benefits liabilities (146,578) 27,459 Net assets released from restrictions used for purchase of property and equipment (Decrease) increase in unrestricted net (deficiency) assets (133,287) 21,910 Temporarily restricted net assets Contributions Investment (loss) income, net (27) 297 Change in net unrealized losses on investments 92 (184) Net assets released from restrictions (1,326) (1,954) Decrease in temporarily restricted net assets (608) (984) Permanently restricted net assets Change in net unrealized gains and losses on investments, including beneficial interest in perpetual trust (247) (99) Decrease in permanently restricted net assets (247) (99) (Decrease) increase in net assets (134,142) 20,827 Net assets (deficiency), beginning of year 20,779 (48) Net (deficiency) assets, end of year $ (113,363) $ 20,779 See accompanying notes

10 Crozer-Keystone Health System and Subsidiaries Consolidated Statements of Cash Flows (In Thousands) Year Ended June Cash flows from operating activities (Decrease) increase in net assets $ (134,142) $ 20,827 Adjustments to reconcile change in net assets to net cash (used in) provided by operating activities: Depreciation and amortization 23,195 22,513 Net gain on sale/disposal of property and equipment (733) (720) Amortization of premium on bonds, net (261) (289) Provision for bad debts 29,904 29,878 (Income) loss from joint ventures (1,345) 4,893 Cash distributions received from joint ventures 4, Net realized and unrealized (gains) losses on unrestricted investments, net 7,323 (812) Restricted contributions and unrealized gains on restricted investments, including beneficial interest in trusts (498) (574) Other changes in pension and other accrued retirement benefits liabilities 146,578 (27,459) Change in certain assets and liabilities: Net patient accounts receivable and other receivables (48,095) (37,192) Estimated third-party payor settlements (5,028) (4,771) Inventories and prepaid expenses and other current assets 2,641 (3,503) Accounts payable and accrued expenses 3,027 5,785 Pension liability (15,773) 2,205 Other assets and liabilities (12,905) 1,913 Net cash (used in) provided by operating activities (2,023) 12,828 Cash flows from investing activities Purchase of property and equipment (24,373) (17,093) Acquisition of businesses (1,718) Decrease in short-term investments, investments, and assets limited as to use, net 138,333 21,137 Joint venture acquisitions and capital contributions (3,800) (299) Net cash provided by investing activities 110,160 2,027 Cash flows from financing activities Restricted contributions Proceeds from short-term borrowings 48, ,000 Repayment on short-term borrowings (59,000) (164,000) Repayments on long-term debt (10,370) (9,684) Deferred financing fees incurred (660) (22) Net cash used in financing activities (21,377) (12,849) Net change in cash and cash equivalents 86,760 2,006 Cash and cash equivalents, beginning of year $ 48,370 46,364 Cash and cash equivalents, end of year $ 135,130 $ 48,370 Supplemental disclosures of cash flow information Cash paid for interest $ 8,028 $ 7,929 See accompanying notes

11 Crozer-Keystone Health System and its Subsidiaries Notes to Consolidated Financial Statements As of and for the Years Ended June 30, 2016 and 2015 (In Thousands) 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Crozer-Keystone Health System ( CKHS or the Health System ) is a Pennsylvania nonprofit corporation that was established in 1990 by the merger of the parent organizations of Crozer-Chester Medical Center in Upland, Pennsylvania, and Delaware County Memorial Hospital in Drexel Hill, Pennsylvania. The Health System primarily serves the residents of Delaware, Chester, Montgomery, and Philadelphia Counties in Pennsylvania, Southern New Jersey, and Northern Delaware. Services provided by the Health System include inpatient and outpatient acute care services, subacute care, emergency and trauma services, nursing and rehabilitative services, physician care services, and other health prevention/promotional services. The Health System includes hospitals, a network of outpatient centers, a comprehensive physician network of primary care and specialty practices, and a sports club. Services of the Health System are provided by the following subsidiaries and affiliates: Hospitals: Crozer-Chester Medical Center ( CCMC ) A nonprofit corporation, operating a 300-bed tertiary-care teaching hospital in Upland, Pennsylvania (Crozer-Chester Medical Center); a 105-bed hospital providing a full range of inpatient and outpatient services in Ridley Park, Pennsylvania (Taylor Hospital); a 25-bed community hospital providing comprehensive acute-care services and wellness care in Springfield, Pennsylvania (Springfield Hospital); and a community hospital providing a full range of outpatient behavioral and community health services as well as primary care in Chester, Pennsylvania (Community Hospital). Crozer-Chester Medical Center was established in 1963 through the merger of Chester Hospital and Crozer Hospital, and became one of the founding hospitals of CKHS in Springfield Hospital joined CCMC in 1990; Community Hospital joined CCMC in 1992; and Taylor Hospital joined CCMC in 1997 and all operate under the CCMC hospital license. Delaware County Memorial Hospital ( DCMH ) A nonprofit corporation, operating a 168-bed hospital facility that offers a broad range of acute and specialized services. DCMH was established in 1927 and merged with CCMC in 1990 to create CKHS

12 CCMC and DCMH provide services at various outpatient facilities, which include Brinton Lake, a comprehensive outpatient care facility that provides access to diagnostic, surgical, and physician services; Surgery Center at Haverford, a surgery center that offers a wide array of outpatient surgical services; Media Medical Plaza and DCMH Health Pavilion, full-service medical facilities that offer a range of outpatient medical specialties, enabling patients to get many of the health care services they need in one location; and Pioneer Urgent Care, an urgent care facility that offers walk-in care for common illnesses and conditions. Pioneer Urgent Care was acquired by the Health System in fiscal year Physician Network: Health Access Network d/b/a Crozer-Keystone Health Network (the Network ) A primary care and specialty physician network containing more than 300 community-based physicians. The Network s physicians practice at more than 80 locations throughout Delaware County and the surrounding areas. Specialty medical practices include cardiology, endocrinology, gastroenterology, gynecology, neurology, obstetrics, psychiatry, and various surgical specialties, including cardiothoracic, vascular, neurosurgical, bariatric, and general surgery. Sports Club: Pennsylvania Health Club, Inc. d/b/a Healthplex Sports Club (the Healthplex ) A full-service health and wellness center providing programs to its more than 6,000 members at its 176,000 square-foot sports club located in Springfield, Pennsylvania, and throughout the Health System. The Healthplex was established in Crozer-Keystone Physician Partners, LLC ( CKPP ) is an organization made up of more than 450 Crozer-Keystone Health Network-affiliated and Crozer-Keystone Health Systemaffiliated physicians. CKPP s focus is to facilitate clinical integration with the Health System to improve clinical effectiveness and reduce costs. Crozer-Chester Foundation and Delco Memorial Foundation (collectively, the Foundations ) accept gifts and bequests and engage in fundraising activities for the sole benefit of CCMC and DCMH, respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America ( GAAP ) and include the accounts of CKHS. All significant intercompany accounts and transactions have been eliminated. Those principles require that net assets and revenues, gains, expenses, and losses be classified as unrestricted, temporarily restricted, or permanently restricted based on the existence or absence of donor-imposed restrictions as follows:

13 Unrestricted Those assets that are available for the support of operations and whose use is not externally restricted, although their use may be limited by other factors such as by contract or board designation. Temporarily Restricted Temporarily restricted net assets include gifts for which donorimposed restrictions have not been met and trust activity and pledges receivable for which the ultimate purpose of the proceeds is not permanently restricted. When a donor restriction expires, that is, when a time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets as a component of other revenue for gifts that are for operations and as other changes in unrestricted net assets for gifts that are for the purchase of property and equipment. Permanently Restricted Permanently restricted net assets include gifts, trusts, and pledges which require by donor restriction that the corpus be invested in perpetuity and only the income be made available for operations in accordance with donor restrictions. Cash and Cash Equivalents Cash and cash equivalents include investments in highly liquid instruments with original maturities of three months or less, excluding cash and cash equivalents included within Assets limited as to use and Investments on the consolidated balance sheets. At June 30, 2016 and 2015, the Health System had cash balances in financial institutions, which exceeded federal depository insurance limits. Management believes that credit risks related to these deposits are minimal. Investments The Health System records investments in marketable securities at their fair value. Debt securities, equity securities, and mutual funds are valued at quoted market prices for the same or similar securities. Investment sales and purchases are recorded on a tradedate basis. The Health System invests in a variety of alternative investments (limited partnerships and hedge funds) which are reported using the equity method of accounting based on the net asset value information provided by the respective partnerships or fund managers. Because such investments are not readily marketable, their estimated value is subject to uncertainty, and, therefore, may differ from the value that would have been used had a ready market for such investments existed. The Health System reviews and evaluates the values provided by the outside parties and agrees with the valuation methods and assumptions used in determining the carrying value of alternative investments. Investments in certain alternative investments can be divested only at specified times in accordance with the terms of the agreements. Investments established for endowments and investments set aside to retire long-term debt are classified as non-current assets. All other investments are classified as current assets. Investment (loss) income, net (including interest, dividends, and realized gains or losses) is included in Excess (deficiency) of revenues, gains, and other support over expenses unless the income is restricted by the donor or law. Unrealized gains and losses on investments, to the extent that such losses are temporary, are excluded from Excess (deficiency) of revenues, gains, and other support over expenses. Declines in market value that are deemed to be other-than-temporary are reported as realized losses, a component of Investment (loss) income, net on the consolidated statements of operations

14 Assets Limited as to Use Assets limited as to use include (a) assets held by trustees under the terms of the respective bond agreements for the payment of debt service and (b) assets set aside by the Board of Directors for future capital improvements, over which the board retains control and may, at its discretion, subsequently use for other purposes. The current portion of assets limited as to use includes investments which will be used to satisfy current liabilities related to debt service. Endowments CKHS follows the requirements of the Uniform Management of Institutional Funds Act ( UMIFA ) as they relate to its endowments. CKHS s endowments consist of individual funds established for specific purposes and consist solely of donor-restricted endowment funds. As required by GAAP, net assets associated with endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions. CKHS has interpreted UMIFA as requiring the preservation in perpetuity of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, CKHS classifies as permanently restricted net assets (1) the original value of gifts donated to the permanent endowment, (2) the original value of subsequent gifts to the permanent endowment and, (3) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is characterized as temporarily restricted net assets until those amounts are appropriated for expenditure by the organization in a manner consistent with the standard of prudence prescribed by UMIFA. CKHS has adopted investment policies for its endowment assets that are consistent with the policies and objectives of its overall investments. The assets are invested in a manner that is intended to produce a positive rate of return while assuming a low level of risk. From time to time, the fair value of assets associated with the donor-restricted endowment funds may fall below the level that the donor requires CKHS to maintain in perpetual duration. Deficiencies of this nature are reported in unrestricted net assets in accordance with GAAP. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market. Property and Equipment Property and equipment are recorded at cost, or if donated, at fair value at the date of receipt. Depreciation is recorded over the estimated useful life of each class of depreciable assets using the straight-line method. Interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as part of the cost of acquiring those assets. The estimated useful life of each class of assets is as follows: Land improvements Buildings and building improvements Furniture, fixtures, and equipment 5 to 20 years 5 to 40 years 5 to 20 years

15 The cost of repairs and minor improvements are charged to expense when incurred. Upon sale or retirement, the asset cost and related accumulated depreciation is removed from the balance sheet and the resulting gain or loss is recorded on the consolidated statement of operations. Impairment of Long-Lived Assets The Health System reviews long-lived assets for impairment whenever events or changes indicate that the carrying value of the asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to their expected future cash flows. If such assets are considered to be impaired, the impairment is measured by the amount the carrying value exceeds the fair value of the assets. There was no impairment recorded in 2016 or Goodwill and Intangible Assets, Net Goodwill and other intangible assets are accounted for in accordance with the accounting guidance in Financial Accounting Standards Board ( FASB ) Accounting Standards Codification ( ASC ) 350, Intangibles Goodwill and Other. Goodwill and indefinite-lived intangible assets are not amortized, but are evaluated for impairment annually or when indicators of a potential impairment are present. The Health System s annual impairment date is March 31. The annual evaluation for impairment of goodwill and indefinite-lived intangibles is based on valuation models that incorporate assumptions and internal projections of expected future cash flows and operating plans. Based on the results of the Health System s reviews, no impairment loss for goodwill and indefinite-lived intangibles was recognized during 2016 or The cost of intangible assets with determinable useful lives is amortized to reflect the pattern of economic benefits consumed on a straight-line basis over the estimated periods benefited. When certain events or changes in operating conditions occur, an impairment assessment is performed and lives of intangible assets with determinable lives may be adjusted and impairment charges recorded. No impairment was recorded during 2016 or Deferred Financing Costs Deferred financing costs consist of bond issuance costs and other costs incurred in connection with issuance of debt and are being amortized using the effective interest method over the term of the obligation

16 Beneficial Interest in Perpetual Trusts The Health System is the irrevocable beneficiary of the income from certain perpetual trusts administered by third parties. The Health System s beneficial interest is reported at the fair value of the underlying trust assets. Because the trusts are perpetual and the original corpus cannot be used, these funds are reported as permanently restricted net assets. The periodic income distributions received from the trustees are recorded as unrestricted or restricted revenue, based on the donors intentions. As the Health System does not have the ability to redeem funds held in trusts by others, these assets are categorized as Level 3 assets (see Note 5). Fair Value of Financial Instruments Cash and Cash Equivalents The fair value of cash and cash equivalents approximates their carrying value because of the short maturity of the instruments. Cash equivalents that are traded on a public exchange are carried at fair value. Investments Investments, Assets limited as to use, and Beneficial interest in perpetual trusts are carried at fair value. See the investment accounting policy disclosed above and Note 5 for additional fair value disclosures related to investments. Long-Term Debt The fair value of long-term debt is estimated based on quoted market prices for the same or similar issues or is estimated using discounted cash flow analyses (see Note 7). Patient Accounts Receivable and Accounts Payable and Accrued Expenses The carrying values of Patient accounts receivable and Accounts payable and accrued expenses approximate fair value. Discounts or Premium on Long-Term Debt Discounts or premiums on long-term debt are reported as a reduction or increase of the face amount of the outstanding bonds and are amortized using the effective interest method over the term of the obligation. Net Patient Service Revenue The Health System records patient service revenue in the period that the services are rendered. Net patient service revenue before provision for bad debts represents gross patient service revenue less provisions for contractual adjustments. The Health System has agreements with Medicare, Medical Assistance, and other third-party payors that provide for payments at amounts different from published charges. The basis of payment under these agreements includes prospectively determined rates per discharge, discounts from established charges, contractual arrangements, prospectively determined daily rates, and certain cost reimbursement methodologies. Net patient service revenue net of provisions for bad debts is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. CKHS receives state funded supplemental payments on an annual basis. Certain of these funds are eligible for a federal match pending annual review and approval by CMS. The federal portion of these payments is recognized when the federal approval is obtained

17 Other Revenue Other revenue is reported for non-patient care when earned and consists primarily of grant revenue, unrestricted contributions, 340b pharmacy retail revenue, and incentive payments related to the implementation and meaningful use of certified electronic health records technology. Receivables for Patient Care Patient accounts receivable for which CKHS receives payment under cost reimbursement, prospective payment formulae, or negotiated rates, which cover the majority of patient services, are stated as the estimated net amounts receivable from payors, which are generally less than the established billing rates of CKHS. Patient accounts receivable are reported net of provisions for doubtful accounts (see below). Allowance for Doubtful Accounts The Health System provides an allowance for doubtful accounts for estimated losses resulting from the unwillingness or inability of patients to make payments for services. The allowance is determined by analyzing specific accounts, historical and expected data and trends, business and economic conditions, trends in health care coverage, and other collection indicators. Patient accounts receivable are charged off against the allowance for doubtful accounts when management determines that recovery is unlikely and CKHS ceases collection efforts. Periodically, management assesses the adequacy of the allowance for doubtful accounts based on historical write-off experience. The results of management s evaluation are then used to make modifications to the provision for bad debts to establish an appropriate allowance for uncollectible receivables. Additionally, the Health System follows established guidelines for placing certain past-due patient balances with collection agencies, which are subject to certain restrictions on collection efforts as determined by the Health System. Electronic Health Record Incentive Program ( EHR Program ) The American Recovery and Reimbursement Act of 2009 established incentive payments under the Medicare and Medicaid programs for certain professionals and hospitals that meaningfully use certified electronic health record technology. Payments under the program are calculated based upon estimated discharges, charity care, and other input data and are predicated upon CKHS s attainment of program and attestation criteria which is subject to regulatory audit by the federal government or its designee. CKHS has opted to follow the grant accounting method, which provides for ratable recognition over the respective attestation period. In 2016 and 2015, the Health System estimated and recognized EHR Program revenue of $837 and $2,427, respectively, within Other revenue on the consolidated statements of operations. Amounts recognized are subject to audit by the Centers for Medicare and Medicaid Services or its intermediaries and amounts recognized are subject to change, with such changes impacting operations in the period in which they occur. Charity Care and Community Service CKHS provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than the established rates. Because CKHS does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue (see Note 13). Additionally, CKHS sponsors certain other programs which provide substantial benefit to the broader community. Such programs include services to in-need populations, including

18 community service programs and services for school-aged children and the elderly. CKHS also actively sponsors programs on health education and wellness. Excess (Deficiency) of Revenues, Gains, and Other Support Over Expenses The consolidated statements of operations include the excess (deficiency) of revenues, gains, and other support over expenses which represents all unrestricted revenues and expenses for the reporting period. Other changes in unrestricted net assets (deficiency) that are excluded from the excess (deficiency) of revenues, gains, and other support over expenses include assets released from restrictions for the purchase of property and equipment, other changes in pension and other accrued retirement benefits liabilities, and changes in unrealized losses on investments, to the extent losses are considered temporary. Advertising The Health System charges the costs of advertising to expense as incurred. Income Taxes CKHS and most of its subsidiaries are nonprofit organizations as described in Sections 501(c)(3) and 509(a)(1) of the Internal Revenue Code and are exempt from taxes. The Health System files U.S. federal, state, and local information returns, and no returns are currently under examination. The statute of limitations on the Health System s U.S. federal information returns remains open for three years following the year they are filed. GAAP requires that a tax position be recognized or derecognized based on a more-likely-thannot threshold. This applies to positions taken or expected to be taken in a tax return. The Health System does not believe its consolidated financial statements include any uncertain tax positions. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Recent Accounting Pronouncements In May 2014, the FASB issued Accounting Standards Update ( ASU ) No , Revenue from Contracts with Customers (Topic 606), to clarify the principles for recognizing revenue and to improve financial reporting by creating common revenue recognition guidance for GAAP and International Financial Reporting Standards. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted. An entity should apply the amendments in this update using either a full retrospective application or a modified retrospective application. Under the full retrospective application, an entity will apply the standard to each prior reporting period presented. Under the modified retrospective application, an entity recognizes the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings at the date of initial application. Revenue in periods presented before that date will continue to be reported under guidance in effect before the change. The Health

19 System is evaluating this new guidance and has not yet determined which approach it will adopt to apply the amendments in ASU or the impact that the adoption of this update will have on its consolidated financial statements. In April 2015, FASB issued ASU , Interest Imputation of Interest (Subtopic ): Simplifying the Presentation of Debt Issuance Costs, to require debt issuance costs to be presented on the consolidated balance sheet as a direct deduction from the carrying value of the associated debt liability (i.e., a contra liability), consistent with the presentation of a debt discount. This amends current guidance that requires debt issuance costs to be presented as a deferred charge on the consolidated balance sheet (i.e., an asset). This guidance is effective for reporting periods beginning after December 15, 2015, with early adoption permitted. The adoption of this update will not have a material impact on the Health System s consolidated financial statements. In May 2015, the FASB issued ASU , Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). ASU removes the requirement to categorize within the fair value hierarchy investments for which fair values are estimated using the net asset value practical expedient provided by FASB ASC 820, Fair Value Measurement. Disclosures about investments in certain entities that calculate net asset value per share are limited under ASU to those investments for which the entity has elected to estimate the fair value using the net asset value practical expedient. ASU is effective for entities (other than public business entities) for fiscal years beginning after December 15, 2016, with retrospective application to all periods presented. Early application is permitted. The Health System is evaluating this new guidance to determine the impact that the adoption of this update will have on its consolidated financial statements. In February 2016, the FASB released ASU , Leases (Topic 842), which will require entities to record additional leases onto the balance sheet. The standard aims to increase transparency and comparability among organizations by recognizing lease assets and liabilities and increasing disclosure requirements about leasing arrangements. ASU will be effective for annual periods beginning after December 15, 2018, and interim periods therein. The Health System is evaluating this new guidance to determine the impact that the adoption of this update will have on its consolidated financial statements. In August 2016, the FASB issued ASU , Not-for-Profit Entities (Topic 95): Presentation of Financial Statements for Not-For-Profit Entities, which will require not-forprofit entities to revise financial presentation to include net asset classifications, provide quantitative and qualitative information as to available resources and management of liquidity and liquidity risk, information on investment expenses and returns, and the presentation of operating cash flows. The standard aims to help the render of the financial statements to better understand the financial position of the organization and enhance consistency among similar organizations. ASU is effective for annual periods beginning after December 15, Early adoption is permitted. The Health System is evaluating this new guidance to determine the impact that the adoption of this update will have on its consolidated financial statements

20 Reclassification Certain items in the 2015 consolidated financial statements have been reclassified to conform with the 2016 financial statement presentation. 3. NET PATIENT SERVICE REVENUE Net patient service revenue before the provision for bad debts by major payor source is as follows: Medicare and Medicare HMO $ 285,593 $ 271,570 Medicaid and Medicaid HMO 162, ,987 Managed care and commercial 316, ,107 Self-pay 4,120 3,690 $ 769,090 $ 740,354 For patient receivables associated with self-pay patients that do not qualify for charity care, including patients with deductible and co-pay balances for which third-party coverage provides for a portion of the services provided, the Health System records an estimated provision for bad debts in the year of service. At June 30, 2016 and 2015, the allowance for uncollectible accounts for self-pay patients as a percentage of self-pay accounts receivable was 84.2% and 83.2%, respectively. CKHS is reimbursed by Medicare for certain programs at a tentative rate with final settlement determined after submission of annual cost reports by CKHS and audits thereof by the program s fiscal intermediaries. CKHS s Medicare cost reports have not been final audited by the fiscal intermediaries for the years ended June 30, 2014 through June 30, In the opinion of management, adequate provision has been made for estimated settlements and potential adjustments resulting from audit and final settlements with third-party payors. For the years ended June 30, 2016 and 2015, Excess (Deficiency) of revenues, gains, and other support over expenses includes net favorable settlements and adjustments for cost reports from prior years in the net amount of $5,581 and $2,123, respectively. In both 2016 and 2015, net revenue from traditional Medicare and Medical Assistance programs constitutes approximately 29% of Net patient service revenue less provision for bad debts. Laws and regulations governing Medicare and Medical Assistance are complex and subject to interpretation. As a result, there is a possibility that recorded estimates may change by a material amount. While no regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretations as well as significant regulatory action. Pursuant to Pennsylvania Act 49 of 2010 ( Act 49 ), the Department of Public Welfare, as approved by the Centers for Medicare and Medicaid Services, established a revised inpatient hospital fee-for-service payment system utilizing all patient refined diagnosis-related groups and provided an enhanced hospital reimbursement model. Act 49 imposes a statewide hospital assessment on net inpatient revenue of Pennsylvania-licensed acute care hospitals

21 for the periods July 1, 2010 through June 30, 2013, which was subsequently extended by Pennsylvania Act 55 through June 30, The assessments have enabled the commonwealth of Pennsylvania to maintain the updated inpatient payment system, make changes to existing disproportionate share/supplemental payments, and to create new payments where applicable. In 2016 and 2015, the disproportionate share and supplemental payments earned, net of related assessments incurred, resulted in operating income of $16,450 and $9,096, respectively, on the consolidated statements of operations. 4. INVESTMENTS AND ASSETS LIMITED AS TO USE The composition of investments and assets limited as to use at June 30, 2016 and 2015, is as follows: U.S. Government agency securities $ 2,644 $ 2,595 Corporate bonds Mutual funds: Fixed income ,088 Domestic equity International equity 284 5,794 Real estate Commodities - 17 Common and collective trusts: Fixed income - 18,958 Alternative investments 8,420 7,623 Marketable equity securities Certificates of deposit 8,872 8,990 Cash and cash equivalents 14,297 35,921 Total $ 36,694 $ 175,330 Investment (loss) income is composed of the following: Interest and dividend income $ 2,864 $ 3,276 Realized (losses) gains, net (3,191) 5,879 $ (327) $ 9,155 Management continually reviews its investment portfolio and evaluates whether declines in the fair value of securities should be considered other than temporary. Factored into this evaluation are the general market conditions, the recommendation of advisors, and the length of time and extent to which that fair value was less than cost. CKHS has the intent

22 and ability to hold investments whose fair values may be less than cost. There were no credit-related other-than-temporary impairments recognized in 2016 or The following table shows the fair value and gross unrealized losses of unrestricted investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2016 and Less than 12 months More than 12 months Total No. of Fair Unrealized No. of Fair Unrealized Fair Unrealized Issues Value Loss Issues Value Loss Value Loss June 30, 2016 Mutual funds: Fixed income $ $ $ $ $ $ Equity $ $ $ $ $ $ June 30, 2015 Mutual funds: Fixed income 7 $ 67,548 $ (1,616) 4 $ 20,760 $ (1,036) $ 88,308 $ (2,652) Equity 1 5,195 (139) 5,195 (139) 8 $ 72,743 $ (1,755) 4 $ 20,760 $ (1,036) $ 93,503 $ (2,791) 5. FAIR VALUE MEASUREMENTS ASC 820, Fair Value Measurement, defines fair value, sets out a framework for measuring fair value, and requires disclosures about fair value measurements. An asset s fair value is defined as the price at which the asset could be exchanged in an orderly transaction between market participants at the balance sheet date. A liability s fair value is defined as the amount that would be paid to transfer the liability to a market participant, not the amount that would be paid to settle the liability with the creditor. Fair value measurements are applied based on the unit of account, which determines what is being measured by reference to the level at which the asset or liability is aggregated (or disaggregated). In determining fair value, when practicable, the Health System uses the market approach which utilizes prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Health System s financial instruments carried at fair value have been classified based upon the fair value hierarchy as defined by ASC 820. The hierarchy gives the highest ranking to fair values determined using unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest ranking to fair values determined using methodologies and models with significant unobservable inputs (Level 3). An asset s or a liability s classification is based on the lowest level input that is significant to its measurement. For example, a Level 3 fair value measurement may include inputs that are both observable (Levels 1 and 2) and unobservable (Level 3)